Guest Post: Mid-Year Personal Tax Planning Tips from Cafe Tax
By Joseph Arsenault, CPA Founder of Cafetax.com
A large majority of taxpayers wait until tax season to communicate with their tax professional to have their taxes prepared. Avoiding tax planning during the year can cost a taxpayer thousands of dollars. Tax planning can be useful, whether the tax return is simple or complex. This is a great time to consider possible strategies and decisions you can make in 2011 to decrease your tax liability or make you a more tax-efficient taxpayer.
Below are some mid-year tax planning tips and strategies to consider.
Consider gifting opportunities. Taxpayers with charitable intentions can reduce their tax liability by gifting to qualifying charitable organizations. Your annual income can fluctuate, thereby increasing or decreasing the value of charitable contributions. Shifting the weight of your charitable contributions between tax years can be an easy way to save on taxes. Additionally, don’t be caught off guard by charitable gift limitations. If you are withdrawing annual required minimum distributions from a retirement account, you should consider transferring the withdrawals directly to charities instead of using other sources of money. If eligible, this will allow you to exclude the income on those withdrawals. Gifting can offer significant tax planning opportunities.
Explore Income shifting opportunities among family members. Members of a family are often in different tax brackets. Shifting income to members with lower tax brackets can mean big tax savings. Ask yourself if you can legally employ a family member in a lower tax bracket. Employing a family member can generate a deduction for the amount you pay them at a tax rate higher than the tax rate they will pay on the income they receive. There are rules to prevent improper income shifting, so make sure you consult with your tax professional before using this strategy. The relationship between employer and employee must be legitimate.
Additional opportunities exist, such as transferring ownership of an appreciated asset to a family member in a lower tax bracket. Just make sure you are aware of the “Kiddie Tax” laws if you plan on involving a child under the age of 18.
Consider deferring income with retirement contributions. Whether you work for an employer or are self-employed you can contribute to retirement plans as long as you have the income to contribute. Salary reduction agreements with your employer can allow you to fund an employer sponsored plan such as a 401k.
Small business retirement plans like SEP IRAs are very useful in reducing income while saving for retirement. The amount you contribute may depend on the amount you earn. Earning more than you expected through the first half of the year? Maybe its time to increase your deductible retirement contributions!
Capital losses carryfowards. Capital loss limitations often lead to carryfowards of losses you have yet to deduct. These losses can be used to offset capital gains. Has the appreciation in one of your assets recently increased? It may be time to realize the capital gain and absorb the unused losses. Just make sure you review the potential transaction with your tax professional beforehand. Factors such as the length of time you have held the asset, or even the asset itself, can affect the ability to absorb carryforwards.
Expect a loss in your S-Corp? Don’t ignore your basis. Shareholder basis is a complicated topic, but it shouldn’t be ignored. Any loss attached to your share of the corporation is limited to basis, which means that it isn’t deductible while your basis is 0. Even worse, withdrawals creating additional negative basis will be taxable to the owner as a return of capital. This may feel like phantom income so if you can use tax planning to avoid it, you should. Monitor the S-Corp income and the basis of the individual owners with the same method of accounting that is on the tax return. By doing this while communicating with your tax professional, you may be able to avoid unexpected income.
Conclusion: Missed opportunities are a common reason for tax liabilities that could have been reduced, but weren’t. There are generally more decisions you can make during the tax year that will reduce your tax liability, versus after the tax year. This requires awareness and tax planning. Some very simple techniques can save you money by making you more “tax-efficient.”
If you enjoyed this article, visit www.cafetax.com for continuing updates, tips and discussions about relevant tax and financial topics.
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Tags: advice, Cafe Tax, carryfowards, Guest Post, mid year tax tips, tax help, Tax Tips
